Understanding the Concept of Economics from the Perspective of Developing Countries

Understanding the Concept of Economics from the Perspective of Developing Countries

Section A

Part 1 (Numerical solution)

i. Calculate the value of R. Hence what is the expected net return to a lender from lending to S borrower?

R = (1 + 0.1)*100

R = 110

Therefore, expected return of a lender while lending $100 to a safe borrower is $10, whereas, if we take its probability of repayment into account which is 1 than our answer will remain the same 10.

ii. What is the expected return to a lender from lending to a U borrower?

R (1 +0.1) * 100

R = 110

Here the return seems to like same but the risk of repayment associated with unsafe lender is high. Hence there is only 0.3% chance that the lender will receive it's lend money. And if we take repayment probability into account then there are chances that the lender will receives 33 dollar of return

R = 0.3 * 110

R = 33

iii. Now suppose that the opportunity cost of capital for the lender is 6. In a world of complete information will the lender lend to the S borrower? Will the lender lend to the U borrower?

Yes lender will lend to both safe and unsafe borrowers because the lender is receiving higher amount then the opportunity cost. In the end, by lending lender will maximize its net profit., however, lender will require additional return from the individuals having lower probability of repayments or may avoid to lend individual with lower probability of repayment at the same rate of return.

Part 2 Civil War and Corruption (b) Corruption & Economic Growth

Over the years, the concept of corruption has widened and it has been used in almost all the western and traditional societies. Today, it has become a worldwide phenomenon. In every country, people at the higher positions have been charged many times and have been involved in corruption cases. Corruption has become very virulent in every nation of the world and it has threatened every society. The weaker the system gets with the passage of time; corruption gets bolder and drains its victim till the last drop of their blood. Corruption is defined as the destruction and the spoiling of a society or a nation. A society in which corruption prevails stops giving value to integrity, ethical and moral principles and things become worse. Such a society starts to decay and enables itself for destruction. Corruption is an old phenomena and it is the abuse of powers by the states officials in order to commit unlawful private gain. Following are some main causes of corruption that affects the economic growth of a particular country

Inadequate regulation

Closed economic and political systems

Opportunity to abuse power

Weak Legal System

Corruption is defined as the destruction and the spoiling of a society or a nation. A society in which corruption prevails stops giving value to integrity, ethical and moral principles and things become worse. Such a society starts to decay and enables itself ...